June 2005
Interview

"You can't be small and efficient"

Jaspal S. Bindra, Chairman of Standard Chartered Bank Nepal Ltd., is also in charge of the entire operations of the Standard Chartered Group in South Asia as its General Manager, South Asia. When he was in Kathmandu late May and early June, he spared some time to share his views on prominent banking sector issues in Nepal and comparison across the South Asian countries. Excerpts from the interview:

The 90s was broadly characterised by the fast speed of automation in the banking industry worldwide. Nepal too caught up with this trend, at least to some extent, with the leadership of StanChart. What important new trends have you identified as picking up recently in this industry?

For Nepal, we are revamping the technology platform. This is a huge investment, but it will put us at par with the most advanced technology platform being used in the StanChart Group worldwide. We are hoping that eventually the whole bank will be in this platform. So, Nepal is one of the few countries we started with in this field. In the banking industry two big technological developments are speeding up. One is the internet as it will be a major mode of communication. As better security mechanisms were developed, the internet has now been more tested and has become more resilient. People have felt more comfortable transacting over the internet. The convenience of the 24-hour internet access will make it the most viable communication channel. The other big technological advancement is mobile telephony. We have already launched a test in Mumbai where we can do credit card transaction through mobile chips, so you don't have to carry credit card. There are establishments that accept the chip on the telephone. In Korea we have been operating this. All utility bills like water bills, electricity bills etc. are being settled through the mobile. You don't need to go to any bank. I think that mobile telephony is going to become a more important communication channel in the future. But it is only a technological advantage; it is not going to take away the rest of the business.

What other changes are showing up? For example in the people's banking habits?

People are getting a lot more comfortable with plastics. They have moved from only cash payments to cash-cum-plastic or to even plastic only; the most advanced nations have opted for plastic alone. The other big change is that people are getting very comfortable being in debt. Very early in their lives, they want to take a car on EMI, take mortgage loan, whereas in my generation we waited till we had a lot of money to do that. They are getting more confident about their ability to earn and have a decent livelihood. The third thing is that the world is becoming a smaller place. The barriers of geography are disappearing. These changes will be the driving force determining how banking will change in the future.

As a person responsible to oversee StanChart's operation in this region, how do you compare the banking sector growth in different countries of South Asia and what are the critical areas the Nepali banks have to improve fast to come up to the regional standard at least?

I think the common factor in Asia is that there is growth. Some are, of course, faster compared to others but there is growth everywhere. No nation has negative growth or stagnation. The other common feature is that there is margin compression in every market. It is not that they have reached the level of maturity where they are stable. But it is not that they are at the primitive stage. So, there is margin compression on a continual basis. It is largely due to competition as the local competition has become more aware of products and the products have become more commoditised. There is also, varying in degrees from country to country, increased liberalisation. The legislation by the government is becoming more and more customer-friendly and bank-friendly. The markets are integrating globally at a lot higher speed. We are seeing new client segments, segments we wouldn't have felt comfortable with in the past. The middle market clients, small and medium enterprises, micro financing have become a lot more viable now. In Nepal, the marginal difference is that the economic growth rate is much slower than elsewhere. Some of it is due to the environment, which is a little bit of a challenge ever since the insurgency. Some of it is just that the things have to move quicker in terms of liberalisation, open competition, integrating etc. For Nepal, interest rate deregulation was created almost together or much earlier than some other economies in this region. It will be a pity if they [monetary authorities] are thinking of reversing that.

Basel-II is around the corner now while Nepal is yet to comply with all the Basel-I requirements. Meanwhile, the market risks, liquidity risks, credits risks in Nepal are perceived to be growing. Against this background, how do you crystal gaze the future of banking in Nepal?

Even without Basel, there are some obvious issues in the Nepali banking. I think one of them is that there are too many fragmented operations with poor governance, comparatively speaking. This is when the world is moving on. The 'governance' standards are becoming a very big factor in the OECD countries. In the developing countries too, it is increasingly becoming a big issue. Nepal has to keep pace with that. There can be very little excuse [being LDC, Ed] in improving governance. Consolidation [of banking industry by way of mergers etc. Ed] has to happen in Nepal as well as in India, Sri Lanka or in Bangladesh. It will be very difficult to operate efficiently in small size. With a bigger size you can be a little bit more efficient. But you cannot be small and efficient. And I think we have this in all the South Asian economies, not just in Nepal. There is the challenge that there are lots of small players who are inefficient.

In terms of Basel-II, I think that in a way it will help the local banks-banks with mid-sized credits, to some extent. This is because banks like ours will have to charge huge amounts of margins to be able to do small sized business, to justify the capital exposure in such a business, whereas the other banks may not need to do so, because they are not following Basel. So, it depends where the client segments are. If the business is with the middle market (smaller borrowers) only, then the local banks might gain for the time being at least. Over time, they too will have to be Basel-complaint. But if we get large projects here, then banks like us will have advantages in terms of cost of capital.

What is StanChart's position on Nepal risk?

We feel very comfortable. We recently increased our presence from 11 to 12 points. We are opening yet another branch tomorrow [Dharan branch of StanChart opened the following day of this interview. Ed]. We are looking at two more locations as well. So, we are not that disturbed. Clearly, we have no difficulty in increasing our geographical presence. We have not complained about the ongoing situation. At the same time, we are looking at new businesses. Hydroelectricity is one such area. We have been operating here for long, since 1989, and we are big here. And we are also in Iraq, Iran, Afghanistan and Sierra Leone. These are not markets free from war, forget about insurgency. For us it is not an excuse to forget a country by blaming the situation. We can't get that easily disturbed.

StanChart is facing some criticism in its Nepal operation for a number of reasons, such as being too much urban-centred, working in the style of a fair weather bank (i.e. not being accommodative with the clients’ needs) and concentrating only on being a bank for the elites. What is StanChart doing to change these perceptions?

We are perceived as a quality player. That is why we are able to maintain higher minimum balance for our depositors. And higher minimum balance is not just to attract elite customers. That is just to reduce our processing cost. If I can attract enough liquidity that way, that is it. Because we are perceived as a high quality institution, people are willing to place money with us even at lower rates. We also don't want to lose deposits. But as you can see, deposits with us are increasing, not decreasing. So, people coming to us are those who are more risk conscious. Rather than going to banks that offer 5 percent interest rates on deposits, they are coming to us, entrusting us their savings at 2 percent. By definition they are more sophisticated clients, more organised clients. It's not that we are dictating them. Similarly, when you look at the asset side, we have some skills in risk management, in customising and structuring transactions, which we believe are quite good. So, naturally we attract transactions that are a little bit bigger and complex. But it's not that we are looking for only these. On the other hand, we are paying pension to all Gurkhas. We are not distinguishing between a rich Gurkha and a poor one.

In fact, this complaint is not only about StanChart. The entire banking industry in Nepal is being perceived negatively by all the stakeholders-the regulators, prime borrowers and general public - for these reasons. What do you think should be done to improve the image of the banking industry as a whole?

There is only one way - good governance. Many people think that the bank can look like a more progressive bank by offering more products or by having better offices or by having better customer services. But that is not true. It is all about good governance. We get awards not because we make money. They don't even check what profits we are making. Nobody comes here to check the level of the quality of our branches or what the office of the CEO looks like. All this comes with the fact that we are a transparent company. We declare all that we have done for health and safety. We have policies, which are conducive to our employees and to our customers. So the large part of it is related with governance. After good governance come branding, product range, transparency in product sales, etc. Most markets have grown out of that. There was a time when the US banks were under cloud about governance. India too had a much bigger cloud on governance. It is improving significantly. It's a matter of time when things change here as well. But right now I would perceive governance to be the main challenge.

When StanChart first came here, it had stated that it was going to specialise in retail lending (consumer lending). Now almost every other bank is focusing on the same business. What new businesses is StanChart now exploring in Nepal?

Something different that we are doing here is cross-border collections and payments. We are doing supply chain business here for large corporations. We are financing the distributors, vendors etc. of the corporations rather than the corporations themselves having to do that. We are selling customised home loans. What other businesses we start will be dictated by what the needs of the market are.

As Nepal is still a starter in industrial development, term loans should be attractive business at least at this stage so as to create opportunities for short-term lending in the future. With robust strength in credit risk assessment, StanChart surely has a critical advantage in this business in the country. But the share of term loans is very negligible in StanChart Nepal's portfolio. It has rather preferred to sit on a huge liquidity. Why?

Honestly, the answer to that is the lack of opportunities. We are not seeing those term loan opportunities in the attractive segments. Proposals have to come in the segments where Nepal has comparative advantages, like tourism, hydroelectricity, and to some extent textile industry. If somebody says that he is going to come here and start a pharma company, then we have to think whether there it is viable. There are no satisfactory patent laws in Nepal. So why would one invest in that industry? But in industries in which we think Nepal has some comparative advantage, we have not seen any proposal coming up.

How do you view the recent order by the Nepal Rastra Bank to the commercial banks to raise the interest rate on deposits? One important fact about it is that the rates of StanChart are the lowest across the banks and this is believed to the main reason that prompted the NRB for this step.

That might be true. But all we can say is that we have to be either in a regulated environment or a deregulated environment. If it is deregulated, we have to go by the commercial forces of demand and supply, because we have the stakeholders to worry about. But the regulator is the first stakeholder, the most important one. So if they regulate, we will come back to that. But the biggest thing is that without having to deregulate and regulate again, if there are opportunities for investments, then the rates will go up automatically.

When Nepal first opened the banking sector for foreign joint ventures, the expectation was that they would help bring foreign investment to other sectors. But that expectation has not been met. And that is one of the complaints with StanChart in Nepal. What is your comment about it?

I think that it is because the environment has not been very conducive, particularly during the last four-five years. People always found it very difficult to find a good investment opportunity. It is all about perception. India gets about three billion dollars as direct foreign investment a year while China gets 60 billion. There is a huge gap in people's perception about the environment. But StanChart bank itself has made a big investment in Nepal recently. We bought 25 percent shareholding from Nepal Bank, which is a very big investment. We hear that the Norwegians are very interested in the power sector. We will hopefully see some of that happening. We know that the government of India wants a few Power Purchase Agreements to address the power shortage in India. We hear that the Americans are keen on textiles. Thus it is happening but it will take time. The foreign investment that India gets is very small compared to the size of the economy. A stable environment would be a very necessary requirement for foreign investment.

Now that Nepal is a member of WTO and the banking sector is one of the areas opened for foreign operators, what possibility do you see for foreign banks setting up their branches here?

We can speak about ourselves only. I would not know how others are looking at it. To everybody who comes to us we tell them that South Asia is a huge economy; it is absolutely poised for great things, which they cannot foresee today but we can foresee because of our presence and experience here.

Nepal's banks, particularly the government controlled ones, are reeling under huge NPA. Is there any possibility for StanChart to take some of these assets and convert them into performing assets by using its expertise in handling such cases?

Yes, we do buy different problem assets from other banks in India and China and convert them. But in Nepal I think the legislation for enforcement of foreclosures is not tested and strong enough. It will be quite difficult for us to say that we can be in a better position to recover the loan from a client of another bank even though we do not know the client properly. If there is a strong foreclosure law, which would allow us to enforce security, we could take some of those problem accounts from other banks and recover the loan taking stronger decisions. We could do it quicker than the other bank, which has not been taking these decisions because of the long and cordial bank-client relationship. But we are still not convinced about the legislation. It took us a long time to do this in India and China. We started doing that only after we realised that we could really enforce our rights.

Due to the piling up of liquidity in the banking sector and the paucity of investment opportunities within the country, some bankers and big depositors are asking the government to allow them to invest in foreign capital markets. What is your opinion?

My opinion is that it is one solution, but not the only solution. They must have a full-proof mechanism to check against loopholes of capital flight because some unscrupulous people might misuse that facility.

Anything new that StanChart is planning for its Nepal operation?

Nothing, except to just grow faster.

What is StanChart Nepal's strategy to retain high performing staff as several staff members have moved in the recent past and staff turnover seems to be rising?